Letter of Credit vs Line of Credit Key Differences for Business Funding
A Letter of Credit is a bank’s promise to pay a seller if goods or services are delivered as agreed. A Line of Credit is a preset borrowing limit you can tap anytime, like a flexible loan.
Both sound like “credit,” so owners often think they’re interchangeable. One protects suppliers; the other gives you cash on demand—confusing when you just need money fast.
Key Differences
Letter of Credit: bank pays your supplier after proof of shipment. Line of Credit: you withdraw cash and repay later. One secures deals; the other fuels operations.
Which One Should You Choose?
Buying from new overseas vendors? Use a Letter of Credit to reassure them. Need ongoing working capital for payroll or inventory? Pick a Line of Credit for flexible access to funds.
Examples and Daily Life
Imagine ordering bulk coffee beans: the exporter wants payment assurance, so your bank issues a Letter of Credit. Next month, you use your Line of Credit to cover café rent until holiday sales kick in.
Can a startup get both?
Yes, if the bank sees solid cash flow or collateral, you can hold both tools at once.
Does a Letter of Credit cost more?
Generally, fees are higher because the bank takes on supplier risk.
Can I use a Line of Credit for international deals?
You can, but it won’t give suppliers the same payment guarantee a Letter of Credit provides.